Car Loans: When to Refinance

There are only three reasons why you should refinance you car:

1) A better interest rate is a very good reason to refinance your auto loan. You should refinance if your new interest rate will be at least 1% less and especially if you will be getting an interest rate that is 3-4% less than your current interest rate. If refinancing will only get you a new interest rate that is less than 1% better, you shouldn't waste your time. It probably seems like going from 6.25% to 5.99% is a big difference, but it is less than 1%. Since the difference is smaller than 1%, the benefit you will get from refinancing is so small that you shouldn't even waste your time.

2) The second reason you should refinance your car is if you can't afford to make the payments. If you are a couple months away from repossession or are at risk of defaulting on your auto loan, you should refinance your car loan right away.

3) The third reason you should refinance your car is to prevent defaulting on your home loan. If the payments on your auto loan are so high that you cannot afford to make mortgage payments, you must consider refinancing your car loan. If refinancing will lower your car payments, you will have more money to put towards your mortgage payments.

You should NOT refinance if your reason for doing so is to get equity out of your car to pay other bills. Since cars are depreciating assets, they do not have any equity. This means that every day they will be worth less than the day before.

Banks sometimes offer "car equity loans," but don't get sucked it. Even if your car is worth more than you owe right now, that won't last long. Borrowing against any equity you have today is always a mistake - all you're doing is stealing from your own future by adding more payments to your current loan. Would you rather make an extra two years of payments on your car so that you can have an extra $100 today? Probably not.

If you do choose to refinance for extra cash now, you will regret doing so in two or three years when you are making those extra couple years of payments. The only reason you should refinance is if you are at risk of defaulting on a major asset.

If you decide that you should refinance, follow this advice:

Walk away if a bank is going to charge you large fees such as "loan origination fees" or "refinancing fees." Only pay small fees like $20 for a new title or lien. The bank should not charge you for your business.

Never add more time to your car loan unless you are desperate to have your payments lowered. You shouldn't refinance using another five-year loan if you originally financed your car using a five-year loan two or three years ago. In a case like this, the only thing refinancing has done is increased the amount of time you will have to pay on your car. If possible, refinance using a loan that will end when your original loan would have ended.

Be sure to consult with your credit union when refinancing. Their rates are excellent, and they really want to help you. Credit unions are more willing to work with a customer than a regular bank is, particularly when there is risk of defaulting.